You might not think it, but emotion plays a huge role in the stocks you choose to invest in and when to sell. And for the most part, they don’t help you make money.
The average private investor trades 75 percent of their portfolio every year, which is a key signal emotion is playing a larger role than it should.
So why do emotions sometime control investors and how can you cut through the noise?
Overconfidence can be costly
If your portfolio is performing well it’s easy to become overconfident and believe that success is inevitable.
Don’t be fooled. A lucky winning streak will always end, and risky behaviour can mean you lose a lot of money.
The same goes for obsessively tracking and researching a stock. The more information you have, the more confident you’ll be, but studies have shown being a “know it all” doesn’t reduce risk.
Keep your eyes wide open
As humans, we don’t see everything that’s in front of us and when under high pressure, we miss even more.
~Novel Serialisation: Heavens Fire~
This trickery affects everyone and as an investor, it can lead to expensive mistakes. So, make sure to balance your urge to act with rational reasoning.
There may be times you need to make investment decisions quickly, but always stop and interrogate what’s in front of you before acting to avoid a costly misjudgement.
Don’t become obsessive
With your portfolio at your fingertips, there’s nothing more tempting than checking the performance of the shares you own.
But becoming obsessive about stocks and their performance exposes you to a raft of emotional triggers that can lead to overreaction and decisions made on the basis of instinct or fear. Each trade also incurs a fee, which adds up and eats away returns.
Instead, every investor should build and refine an investment strategy and then apply it consistently. This will anchor your thought processes and help you avoid the pitfalls of emotional decision-making.
Don’t be easily swayed
If you read the financial press, it can seem like you’d be silly not to act on the advice given out. But the most discussed stocks in the financial press are more often than not “expensive junk”
Instead, opt for factor-based investing to find the best performers. Factor investing is not new; it’s a well-researched approach that focuses on having strong exposure to the most important traits in shares, like value, quality and momentum.
It can also diversify your portfolio by introducing new opportunities in sectors you hadn’t considered before.
Don’t keep all your eggs in one basket
If your portfolio isn’t diverse, you leave yourself exposed to market volatility and the emotional triggers that come with it.
Try to diversify your investments as much as possible to alleviate some of the pressure. This will help to balance stocks that aren’t performing so well with those seeing positive results, giving you greater confidence in your portfolio and reducing the chances of you succumbing to emotional investing.
By Ben Hobson, Markets Editor, Stockopedia
About the author
I oversee the content at Stockopedia – a stock market investment research platform that’s liberating investors with professional-grade tools and resources to beat the market.
Stockopedia processes and presents financial data, investment strategies and portfolio analytics. Everything we do is based on a strong belief that successful investing relies on rules, checklists and evidence (rather than stories and emotions). Our editorial content has the job of explaining all that in ways that everyone can understand.
